Category Archives: Economics

Island tourism in 1928

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We wandered into Antique Alley yesterday afternoon. It’s always an adventure. We were looking for one thing, and of course I found something else of interest.

Hanging somewhat randomly in the middle of the store was a single-page advertisement pushing for public support for increased tourism spending.

Check out the graphic, which lays out the relative size of the sugar, pineapple, and visitor industries in 1928. Tourism at that time brought in less than 10% of the income of agriculture.

The message was pretty simple. Spend more on advertising, and more tourists will come.

The sponsor: The Committee of 100. It would be interesting to find more about it’s membership.

In 1929, about the time the ad was probably published, there were only 22,000 visitors to the islands for the year. That number dropped by 50% over the next few years as the U.S. struggled with the Depression, but as we know came soaring back later. Tourism at that time had a relatively minimal footprint, and little effect on the daily lives of residents.

That’s no longer the case. This year–2018–it’s predicted that visitor arrivals will hit 9,500,000. But the message from the industry is still the same. Advertise more so that more visitors will come.

Back in 1978, then-Gov. George Ariyoshi was warning about the uncontrolled growth of tourism.

From an NBC report:

They are expecting three and half million tourists to hit the beaches of Hawaii this year, a record. Most spend fifty to one hundred dollars a day. They stay a week or two, and then go home. But some find it so delightful here that they want to move in to stay. The state’s population is growing at a rate twice as fast as the rest of the United States. Honolulu didn’t look like this a few years ago. It is growing up, spreading out, and has become more and more crowded, congested and difficult to live in. The state’s governor, George Ariyoshi, is very concerned.

Gov. GEORGE ARIYOSHI (Hawaii): When we looked at how fast we were expanding, when we looked at the tremendous development taking place in our community, we asked the question, if we went on a straight line projection on the same basis, what will happen? And the conclusion was, in 34 years, we will double the population of this state. If we double the population of this state, on the island of Oahu for example, where there has been a great deal of growth now, we would have to duplicate every structure that we have here, every hotel, every high rise. And some of us fear that that’s too much out here on this island.

I don’t think we fully appreciated his concerns at the time. That was our loss.

About those private purpose bonds….

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The Maui News recently reported construction of the new West Maui Hospital and Medical Center in Kaanapali has been delayed again, this time by the tax “reform” legislation pending in Washington.

The House version of the tax bill would eliminate tax-exempt private activity bonds, which had been expected to provide the basic financing for the new hospital. These tax-exempt bonds allow borrowers to cut the cost of financing, which can sometimes make a difference in whether or not a project can move forward.

Hawaii packages these as special purpose revenue bonds. The legislature approved a couple of new bond issues during the 2017 session.

Special Purpose Revenue Bonds; Maui; MauiGrown Coffee, Inc. ($). Up to $13,000,000 “for the purpose of assisting MauiGrown Coffee, Inc., a Hawaii corporation, with the expanded operation of its coffee farm and mill in Puukolii, Maui.”

Special Purpose Revenue Bonds for Honokaa Land Company, LLC. Up to $50,000,000 for “acquiring, developing, and renovating agricultural facilities and structures.”

This kind of bond financing has been used to support Hawaii’s hospitals, private schools and colleges, utilities, low income housing projects etc., all considered to benefit the public. It’s potential elimination has been called “devastating.”

CityLab reports the GOP tax plan “could kill a million affordable homes in a decade” by reducing financing options.

And the proposed sharp drop in corporate tax rates will indirectly make it more costly for states, counties, and municipalities to use bond financing for their respective needs, according to a commentary published by The Bond Buyer.

According to an article in the Financial Times, the tax bill has “the potential to curtail as much as 30 per cent to 40 per cent of annual issuance in the $3.8tn municipal bond market.”

In plain language, municipalities could lose 30-40% of the revenue they have raised by issuing tax exempt bonds.

I’m no expert in municipal finance, but it certainly seems like our news media needs to take a good look at how the options being considered by the Republican-controlled Congress will impact state and county governments here in Hawaii.

A vignette from the Kahala housing market

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On the other side of the Waialae Country Club, there’s an area of large homes along and near the ocean (well, really, most would call these mansions, from small to extremely large). A few also front the golf course.

Here’s one of those we walk past on some of our early morning outings. It’s a 7,000 square foot, two-story house with six bedrooms and six baths, and a swimming pool, along the 7th hole at Waialae. It appears to be mostly unoccupied. In the two years we’ve walked through the area, we have perhaps seen evidence of anyone staying there once or twice, for only a few days at most. Usually the yard crew would be the only people to be seen.

City real property records show that the building is currently assessed for tax purposes at $1,805,000. The 13,000+ square foot lot is appraised at another $3,001,300. The annual real property tax is $38,756.70, according to city records.

Viewed from above.

From Google Streetview.

Well, a couple of weeks ago construction fences went up to block dust, and a demolition crew moved in. The $1.8 million structure, pool, and landscaping are now history.

The property was purchased in 2004 by Up-Front Group Co. Ltd., a Japanese entertainment company. The owners have now applied for a building permit for a new structure they value at $1.8 million.

The permit doesn’t say much about the new building.

I suppose this is all good news for the local companies that benefit from the construction. It will create jobs, at least in the short run. And the tax revenue certainly adds to city coffers.

Nearby, along the beach, is a string of perhaps a dozen mansions. All also empty nearly all of the time.

It’s hard to comprehend how much corporate or personal wealth is tied up in these chunks of island real estate without providing housing for anyone.

All I can do is shake my head in wonder. And share the thought here.

Is commercial real estate going to drive the next financial crisis?

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Here’s a dark view that may cause more than a few sleepless nights if you’re into economic predictions.

I’ve blogged before about the linkage between the failure of the big retail chains and the fate of what remains of the newspaper industry, since advertising by those chains has long been a stable source of income for publishers. Newspapers used to be the primary place for real estate, help-wanted, automobile sales, and classified, all of which have now migrated to competing digital platforms. The implosion of Sears, J.C. Penney, and others is just another big shoe falling.

Now an old friend and successful blogger, Charles Smith, now predicts that what we’re seeing is likely to turn into the next massive financial crisis. Commercial real estate, including the companies that built or own those empty malls and buildings across America, has been built on credit, just like the housing market that crumbled in 2008.

With malls and office buildings facing tough times, Smith predicts there’s going to be big trouble when these loans come due and can’t be rolled over due to a lack of remaining equity.

Talk about an overvalued market set up for a fall. It isn’t just malls becoming empty retail wastelands–it’s Corporate America shifting to flex-work and work-at-home, slashing the need for floor after floor of costly business-park office space.
It’s about restaurants moving to smaller spaces as they move to serving more meals via delivery services.

Commercial real estate is grossly overbuilt in retail and office space. Combine sky-high valuations with cratering demand and billions in short-term CRE loans that must be rolled over into new loans, and we don’t have a liquidity crisis, we have a collateral crisis– the assets supporting the debt are no longer worth the loan balance.

Unless the Federal Reserve intends to buy up every dead and dying mall in America, this is one crisis that the Fed can’t bail out with a few digital keystrokes. Gordon T. Long and I discuss this brewing crisis and its potentially devastating consequences in our program, Is Retail CRE The Next Financial Implosion?

His “Of Two Minds” blog is worth being on your reading list. Whether you agree with his analysis or not, it will make you think.